Canoo Inc. v. DD Global Holdings Ltd.

Background

Canoo Inc. sued DD Global Holdings Ltd. under Section 16(b) of the Securities Exchange Act of 1934. Section 16(b) requires certain corporate insiders who own more than 10% of a company’s stock to return profits from a qualifying purchase and sale, or sale and purchase, of the company’s securities within six months.

Canoo alleged that DD Global, which had once owned 80% of Canoo’s issued share capital and could elect a majority of Canoo’s board, sold 35,273,268 Canoo shares to AFV Partners in November 2021. Canoo alleged that DD Global remained the beneficial owner of more than 10% of Canoo’s stock after that sale. In March 2022, DD Global sold 10,500,000 Canoo shares to Bank J. Safra and simultaneously acquired 10,500,000 notional shares through a participation note. Canoo alleged that the November sale and March acquisition could be matched under Section 16(b) and produced short-swing profits.

DD Global moved to dismiss under Federal Rule of Civil Procedure 12(b)(2), arguing that the court lacked personal jurisdiction, and Rule 12(b)(6), arguing that Canoo had failed to state a claim.

Personal Jurisdiction

The court held that Canoo made the required initial showing that personal jurisdiction over DD Global was proper. In securities cases, the relevant forum for this analysis is the United States rather than a particular state or district. The court found that Canoo adequately alleged DD Global’s contacts with the United States, including its substantial investment and governance relationship with Canoo, its entry into a National Security Agreement with the U.S. government concerning its Canoo holdings, and its transactions involving Canoo shares listed on the NASDAQ.

The court also rejected DD Global’s argument that the private transactions did not support jurisdiction because they were not completed on a U.S. exchange. It reasoned that Section 16(b) applies to private transactions and that the alleged conduct involved securities of a U.S. company whose shares were traded exclusively on the NASDAQ. The court concluded that the alleged conduct could reasonably have been expected to affect U.S. shareholders and that exercising jurisdiction would not be unreasonable. It therefore denied DD Global’s motion to dismiss for lack of personal jurisdiction.

Section 16(b) Claim

The court held that Canoo plausibly stated a Section 16(b) claim. The parties did not dispute that Canoo adequately alleged the basic elements: DD Global was a beneficial owner of more than 10% of Canoo’s common stock and completed a sale and purchase of Canoo securities within six months.

Extraterritoriality

DD Global argued that applying Section 16(b) would improperly apply U.S. law to conduct occurring outside the United States. The court applied the framework from Morrison v. National Australia Bank Ltd., under which the Exchange Act applies to transactions involving securities listed on a domestic exchange or to domestic transactions in other securities.

The court concluded that Canoo’s allegations satisfied the first part of that framework because the transactions involved Canoo common stock listed on the NASDAQ. It distinguished cases involving foreign purchasers, foreign-issued shares, and foreign exchanges. The court held that Section 16(b) could apply even though the transactions were private or arranged abroad. Because the first part of the framework was satisfied, the court did not address DD Global’s arguments under the second part.

Alleged Profits

DD Global argued that Canoo had not alleged a profit because the actual price in the November 2021 sale was $6.53 per share and the reference price in the March 2022 acquisition was approximately $6.72 per share. Canoo proposed measuring the alleged profit by comparing those transaction prices with Canoo’s market prices or volume-weighted average prices on the transaction dates. Canoo relied in part on a Securities and Exchange Commission rule addressing transactions involving different types of derivative and underlying securities.

The court held that Canoo had alleged enough facts indicating that DD Global received a profit for the claim to survive dismissal. It did not decide whether Canoo’s proposed calculation method would ultimately be valid. The court stated that the viability of that method should be addressed later, after development of a fuller factual record.

Unorthodox-Transaction Exception

DD Global also argued that unusual circumstances made Section 16(b) inapplicable. It contended that the November 2021 sale was compelled by the National Security Agreement and that the March 2022 acquisition merely preserved its economic interest after it sold Canoo shares.

The court rejected this argument at the motion-to-dismiss stage. It held that the transactions were not sufficiently unusual and were not involuntary. DD Global could have chosen to have its Canoo shares transferred to a voting trust instead of selling them to comply with the ownership-reduction requirements. The court also held that DD Global’s decision to acquire the participation note was not involuntary because the agreement required disposition of shares, not acquisition of the note. The court further stated that, even if the transactions were considered involuntary, the allegations did not eliminate at least the possibility of speculative misuse of inside information.

Disposition

The court denied DD Global’s motion to dismiss. The order allowed Canoo’s Section 16(b) claim to proceed, but it did not determine the amount of any recoverable profit or the ultimate merits of the claim.